July 5, 2010

Well, better late than never:

rates on 10-year Treasury bonds are only about 3 percent, many consumers still carry tens of thousands of dollars of credit card debt at 20 percent or more. This burden has been a continuing drag on spending. The federal government could reduce it by borrowing at 3 percent and lending to consumers at 8 percent under a one-time debt-restructuring plan.

With their debt service payments cut by more than half, consumers could increase spending immediately. And the five-percentage-point spread on money lent under the program would help cover its administrative costs, and maybe even relieve short-run government budget pressure.

This is, of course, correct, though I'd only push it up 4%, myself. I originally suggested this February 9, 2009. It was the right thing to do then, it's still the right thing to do.

As David Anderson notes, this would be a huge help to ordinary people:

Going from 18% to 8% interest, the individual with $10,000 in credit card debt would see their initial monthly payment go from $250 a month to $167 per month. Using a declining minimum payment formula of (monthly interest expense +1% of current balance), the debt burden at the end of the year is still $9,000 but the interest expense declines from $1,570 to $700. That gap of $870 is greater than the ARRA Making Work Pay tax credit and it most likely would be targeted at individuals with a high marginal propensity to spend (as evidenced by credit card debt.) If balances or interest rates are higher, the freed up cash flow would be even greater.

Also the government can make real, significant money by doing this. All it is is arbitrage. If you can borrow money cheap and lend it at higher rates that's free money. Not only would that help consumers, and the economy, it would also reduce the deficit. Win/Win/Win. If Blue Dogs are really sincere about their belief in deficit reduction they should jump all over this suggestion.

Note that rates being so high is a classic case of market failure. The banks are charging more than they need to in order to make a profit. In an actual free market other banks are supposed to step in and undercut them, but that isn't happening. We could argue about why (they're a collusive oligopoly or they're broke being the most probable causes), but in the immediate term, it doesn't matter, what matters is fixing it.

But I doubt it will happen. Why? Because the banks are making a TON of money by gouging customers, and they own DC. I suspect the best we can hope is that this is a warning shot across their bows, a message to reduce the looting or pillaging to "acceptable" levels.

Which will be a heck of a lot higher than you might like, but hey, they run the place.

Can you help us out?

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